In the Field

The $6.3 billion Indian pharmaceutical industry is at a crossroad. Aiming to be the international home for quality drugs, which could in itself propel India's market to $20 billion by 2015 according to recent estimates, the generic hothouse is clearly moving beyond its earlier low-cost mindset.

Indian drug manufacturers are focusing on gaining leadership in their core, low-cost generic drug businesses by improving operating efficiencies and investing in innovation. The Indian government is also creating the right investment climate for both multinational corporations (MNCs) and Indian companies by addressing key concerns about intellectual property protection. In 2005, the government adopted the Patents Amendment Act to make the country compliant with the World Trade Organization's TRIPS regulations, which ultimately improve parallel trade and bring quick regulatory clearances.

Globally, India's drug industry ranks fourth in terms of volume (8% share of global sales) and 13th in value (1% share of global sales). The country produces 20–24% of the world's generic drugs (in terms of value) and is one of the top five active pharmaceutical ingredients producers (6.5% share), growing at 8–10% annually, according to a directive by India's Ministry of Commerce and Industry.

A study by McKinsey & Company confirms the fresh demand in India for drugs and pharmaceutical products in the forthcoming years. "Sheer size of the Indian market is one aspect. What is important is the incremental growth," said Palash Mitra, one of the study's authors. With the market set to add $14 billion in demand by 2015, competition and the need for innovation in drug processes and marketing strategies will balloon, he added.

The challenge will be different for large domestic companies, their smaller rivals, and MNCs, according to McKinsey. Large Indian companies will have to contend with aggressive attacks by smaller companies and the introduction of patented products by the major players, while the smaller companies will need to learn to manage size and complexity. In the past few years, larger drug companies have been growing at around 9% per year, an average growth rate as compared with other sectors, but smaller companies rose more rapidly, to the tune of 12%–14%. This growth has come at the cost of Big Pharma, which has been losing market share since 2000. The local industry has edged out MNCs whose 75% share of the market in 2000, fell to 35%.

Echoing these sentiments, a 2007 Goldman Sachs report predicts that India will be the fifth largest pharmaceutical market in the world by 2020, with global sales of $43 billion. Factors helping the surge include a growing middle class segment with disposable incomes, and increasing incidences of lifestyle diseases such as diabetes and hypertension. The gradual shift in disease profile and adoption of patented products is also boosting demand.

Consequently, a number of MNCs have entered the Indian market, and 16 of the 20 largest drug companies in the world already have a presence in India. In fact, drugs and pharmaceuticals make up the eighth largest foreign-direct-investment sector in India.

The country is already home to some of the world's most prominent makers of generic drugs, including Dr Reddy's Laboratories (Hyderabad), Ranbaxy Laboratories (New Delhi), and Sun Pharma (Mumbai ), all of which compete with US-based companies such as Merck and Pfizer. Indian companies are also using acquisitions to increase their market muscle and geographical reach.

"Indian generic companies have been particularly active in acquiring smaller foreign generic companies, especially in Europe and the US. They are potentially the most aggressive and are now able to get financial backing to contemplate the acquisition of significantly larger companies," says one industry analyst. Local players garnered a combined commitment of about $221 million from large private equity players in 2005, alone.

The market does have its negatives though. McKinsey's Gautam Kumra says the Indian government needs to expand its healthcare infrastructure to rural hospitals and clinics. "Around 90% of the Indian population is uninsured and must pay out-of-pocket for pharmaceuticals and healthcare services. Helping to accelerate the growth of private insurers in India would drive up drug sales," he explains.

Ashish Singh, managing director of Bain, a global business consulting firm, noted: "If Indian pharma is effective in shoring up its operating and cost structure, promoting innovation and gaining more regulatory credibility, the challenges both from mature markets and from developing countries like China should substantially lessen."